It is no secret that European lawmakers and regulators intend for euro-denominated clearing activities to be moved to the EU27 after the UK exits the European Union. Recent proposals to amend the European Market Infrastructure Regulation (EMIR) confirm this. On July 10, 2017 Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), proposed that in light of Brexit, the European Commission should take it a step further and require direct EU supervision of an even wider scope of third country market infrastructure providers.

In a press release dated June 13, 2017 the Commission announced plans to amend the EMIR to impose “robust” supervision of clearing houses and to bring certain derivative clearing activities within EU territory. Under the proposed rules, certain central counterparties (CCPs) considered by ESMA to pose systemic importance to EU financial markets may need to shift from London to a remaining EU27 Member State.

The proposal introduces a new "two tier" system for classifying third-country CCPs. Non-systemically important CCPs will continue to be able to operate under the existing EMIR equivalence framework. However, systemically important third-country CCPs will be subject to stricter requirements, including:

compliance with EU prudential requirements in addition to local rules;

requiring certain types of collateral to be held in a CCP;

asset segregation and liquidity arrangements;

ability of EU supervisors to directly request information; and

on-site inspections by EU supervisors.

In addition, the Commission, upon request by ESMA, would be able to designate third-country CCPs to be of such systemic importance to the stability of EU financial markets that they would need to be established in the EU in order to provide services.

In a letter to the Commission dated July 10, 2017 Maijoor states that a significant number of key market infrastructures are based in the UK and following Brexit the corresponding financial market activity will be located outside the EU. He proposes wide-scale reform of third country equivalence provisions in other areas of the financial system, such that credit rating agencies, trade repositories, benchmark administrators, data providers and trading venues would become subject to requirements similar to those proposed for CCPs. In addition, he suggests that ESMA should be empowered to impose fines and penalties on third-country entities should they fail to comply with EU requirements.

While Maijoor’s proposals were not submitted as part of any formal consultation process, Maijoor tied them to the Commission’s “Capital Markets Union” (CMU) agenda of reforms, the mid-term review of which completed on July 11, 2017. However, as with other regulated sectors affected by Brexit, whether (or when) these proposals come to fruition may depend on the outcome of Brexit negotiations happening in parallel.

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